ICICI Securities has upgraded Ashoka Buildcon (ASBL) from “REDUCE” to “BUY,” setting a target price of Rs 311, reflecting a potential upside of 30% from the current market price of Rs 240. The company’s strategic sale of its BOT (Build-Operate-Transfer) assets to India Highway Concession Trust, sponsored by CDPQ, marks a critical milestone, enabling an exit for Macquarie and strengthening Ashoka’s financial positioning. With an order book of Rs 190 billion, Ashoka is poised to capitalize on a robust pipeline of infrastructure projects, signaling positive growth for the coming fiscal years.

Strategic Asset Sale to CDPQ

Higher-than-expected Valuation:
Ashoka Buildcon has finalized the sale of its BOT assets to India Highway Concession Trust (CDPQ) for Rs 25 billion, exceeding previous estimates of Rs 17 billion. This transaction signifies a substantial inflow for Ashoka, enhancing liquidity and strengthening the company’s balance sheet.

Exit for Macquarie Investment:
The CDPQ transaction facilitates an exit for Macquarie, an investor since 2012. Ashoka will use part of the proceeds (Rs 15 billion) to acquire Macquarie’s stake in its BOT assets. This buyout removes a long-standing overhang on the stock and allows for a net cash inflow of approximately Rs 8 billion, which will primarily reduce working capital debt.

Robust Order Book and Margins

Expanding Order Book:
As of H1FY25, Ashoka Buildcon’s order book stands at Rs 190 billion, representing a 2.4x multiple of its trailing twelve-month revenue. This strong pipeline positions Ashoka for sustained revenue growth and margin stability.

Anticipated Margin Improvement:
ICICI Securities projects Ashoka’s EBITDA margin to reach 9.5% by FY26, supported by efficient project execution and the benefits of a streamlined balance sheet following the asset sale.

Upgrade to “BUY” Rating

Target Price and Valuation:
ICICI Securities values Ashoka Buildcon at Rs 311 per share, based on a sum-of-the-parts (SoTP) methodology. This valuation includes:

EPC Business: Valued at 12x FY26E EPS, estimated at Rs 166 per share.
HAM (Hybrid Annuity Model) Assets: Valued at Rs 93 per share.
BOT Assets: Valued at Rs 108 per share after adjusting for the Macquarie exit.
The “BUY” rating reflects confidence in Ashoka’s strategic steps, solid financial position, and growth potential within the infrastructure sector.

Key Financial Metrics and Growth Forecasts

Revenue and EBITDA Projections:

FY24: Revenue projected at Rs 77.3 billion with an EBITDA margin of 8.2%.
FY25E: Revenue anticipated at Rs 86.5 billion, with margins improving to 9.1%.
FY26E: Revenue expected to grow to Rs 90.1 billion, with EBITDA margin reaching 9.5%.
Profit and Earnings Growth:
Ashoka’s PAT is forecasted to grow from Rs 4.3 billion in FY25 to Rs 4.7 billion in FY26. EPS is projected to increase from Rs 15.3 in FY25 to Rs 16.9 in FY26, reinforcing a positive outlook for shareholders.

Risks and Industry Outlook

Pipeline for Road Construction:
The road construction sector in India has witnessed delays in project bidding due to regulatory processes, including approvals for Bharatmala Pariyojana. Despite the challenges, ICICI Securities expects a resurgence in bidding activity in H2FY25, benefiting infrastructure-focused companies like Ashoka.

Competitive and Financial Risks:
Potential risks include fluctuations in input costs, execution delays, and competitive pressures within the EPC and HAM segments. Additionally, successful execution of the asset sale by March 2025 is crucial to ensure Ashoka’s continued financial stability.